NY futures came under some pressure this week, as March dropped 353 points to close at 78.35 cents.

The market went on a roller-coaster ride this week, first dropping around 550 points from 82.00 to 76.50 cents, then bouncing towards the 80.00 cents level, only to pull back again going into today’s close. Since posting a high of 84.65 cents on January 12, the March contract has seen a range of over 800 points peak-to-trough.

The market went through several support levels during this decline, with the most important one being the breach of the uptrend line dating back to mid-November. This triggered another wave of spec long liquidation and it wasn’t until yesterday when trade buying finally started to stabilize the market.

What was quite surprising about this decline is that open interest didn’t really drop by much. Since posting a new record open interest of 320,744 contracts on January 25, when March was trading at 82.50, we only saw it drop by 16,912 lots to 303,832 contracts as of this morning. In other words, even though the market has fallen over a cliff and broke through all kinds of support levels, speculators have for the most part held on to their net long position. There are two ways to look at this stubbornness by speculators - either they have a lot more staying power than we thought or the big flush-out is still ahead of us.

By the same token the trade still has a lot of cotton to fix. Today’s CFTC on-call report showed that as of last week mills had made some headway and fixed nearly a million bales on March (2.8 million to go), but unfixed on-call sales in May and July continued to increase. In total there were still 10.7 million bales open in current crop. This number has probably dropped below ten million bales by now, but even so it is still a massive amount to get out of over the next 4-1/2 months. To put this into perspective, specs would basically have to liquidate their entire net long in order to provide the necessary liquidity for mills to get their fixations done!

US export sales continued at a healthy pace last week, as 344,800 running bales of Upland and Pima cotton were sold for both marketing years combined. Participation was broad-based with 24 markets buying, while 28 destinations received shipments of 317,900 running bales. Total commitments for the season have now reached 12.6 million statistical bales, of which 4.7 million bales have so far been exported. For the coming season we now have nearly 1.7 million statistical sales on the books.

We are not surprised by this strong pace of sales, since merchants cannot afford to hold on to stocks given the strong inversion to new crop. In a little over four months the price of cotton will be based on December futures and it therefore makes no sense to carry cotton and then have it repriced at a lower benchmark.

The fact that there is an unusually high amount of low mike cotton in West Texas this season is also helping sales, since they come with steep discounts. The sheer amount of low mike cotton leaves merchants with no pricing power and mills are therefore able to pick up some decent cotton at attractive prices.

So where do we go from here? As already mentioned, speculators have so far demonstrated a lot more staying power than we thought. Maybe the weaker dollar, higher inflation expectations and stronger GDP growth around the globe keep specs invested for now. This would be bad news for the trade, who needs sell-side liquidity from speculators in order to get out of fixations/shorts.

If the specs block and mills get nervous, it can lead to spikes like we have seen over the last couple of sessions. However, even though the level of unfixed on-call sales is still historically high, March fixations are now manageable and mills are only chasing the market up to a certain point.

We therefore see a market that is well supported, but will also run into plenty of overhead resistance once futures prices stray too far from the cash market. In other words, we expect prices to move sideways in a 75-81 cents range, similar to what we experienced a year ago.

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